Draft Financial Regulators' Powers (Technical Standards Etc.) and Markets in Financial Instruments (Amendment) (Eu Exit) Regulations 2019

John Glen Excerpts

Wednesday 20th February 2019 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Financial Regulators’ Powers (Technical Standards etc.) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019.

May I first say what an enormous pleasure it is to serve under your chairmanship, Sir Gary? It certainly feels like a long time since I was your researcher 22 years ago.

As the Committee will be aware, particularly Front Benchers, the Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the European Union without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the United Kingdom. This instrument forms part of that work.

There are two components to the instrument. The main component follows on from the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, debated and made in October 2018, which transferred responsibility for fixing deficiencies in level 2 binding technical standards—BTS—to the UK financial services regulators. Consistent with the approach taken in that SI, this transfers responsibility for any new BTS adopted by the EU Commission since the previous SI was laid to ensure that those can also be fixed ahead of exit day. The second, smaller component of this morning’s SI makes minor correcting amendments to the Market in Financial Instruments (Amendment) (EU Exit) Regulations 2018 that was debated and made in December 2018 to ensure that it operates as intended if the UK were to leave the EU without a deal. The approach taken in the legislation aligns with that of other SIs being laid under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context.

As I set out during the financial regulators’ powers SI debate on 10 October, as a result of the UK leaving the EU the Government had to decide how to allocate responsibility for the huge body of financial services legislation being brought on to the UK statute book by the European Union (Withdrawal) Act. A significant volume of the legislation consists of EU level 2 BTS, which run to between 7,000 to 8,000 pages. The technical standards do not take policy decisions, but set out at a granular level the requirements that firms need to meet to implement policy set out in higher EU legislation.

Common examples of technical standards are those that set out the processes for firms to provide supervisory information to regulators, including the specific form templates that firms should use. The responsibility for developing and drafting the technical standards currently lies with the European supervisory authorities—ESAs—and they are then adopted by the European Commission. The European Union (Withdrawal) Act will bring the technical standards into UK law at the point of exit in the event that we do not reach an agreement with the EU on an implementation period. Many of the technical standards will be deficient and will require fixing to work effectively in a UK stand-alone regime.

The financial regulators’ powers SI that was debated last October delegates the European Union (Withdrawal) Act power to fix deficiencies to the UK financial services regulators so that they can ensure onshored technical standards operate effectively from exit day. It sets out the procedure and requirements that the regulators must follow for amending technical standards in future. The SI listed all EU BTS that were in force at the point when the SI was laid. However, since the 2018 regulations were made, further BTS have been adopted by the Commission. It is a live process. The European Union (Withdrawal) Act will operate to bring the new BTS into UK law at exit day—automatically, as envisaged and as set out previously—and they contain deficiencies that need to be addressed to ensure that they work effectively in the UK after exit. It will be helpful for me to illustrate those deficiencies, because there will be references to the European Securities and Markets Authority versus the Financial Conduct Authority. They are not deficiencies in the functioning, but meaningful corrections to the wording will have to be made.

Responsibility for fixing any deficiencies in these new BTS needs to be transferred to the UK regulators. The draft instrument does that by adding the new BTS to the schedule of the financial regulators’ powers SI, bringing them into scope of those regulations. Specifically, it adds BTS relating to the benchmarks regulation, the European long-term investment funds regulation, the market abuse regulation, the bank recovery and resolution directive and the capital requirements regulation, all of which have been recently adopted by the Commission.

In addition, the draft instrument also makes minor amendments to the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, to ensure that it effectively addresses deficiencies in the retained EU law relating to markets in financial instruments. The changes affect schedule 3 to the regulations, which deal with the transfer of functions to the Treasury and the regulators.

Regulation 3 of the draft instrument corrects a number of minor errors. Regulation 3(a) corrects a reference to regulation 396/2014 to regulation 596/2014. One wrong digit meant that the provision being amended did not refer to the market abuse regulation, as intended, and consequently the Treasury’s power to make equivalence determinations in relation to regulated markets would not work effectively. Regulation 3(b) removes a provision relating to EU arrangements between member states, which was overlooked. It enables the Treasury to set out the criteria under which the operations of a trading venue in a host member state are to be considered to be of substantial importance for the functions of the markets and the protection of investors in that state. This provision will be redundant once the UK is no longer a member state.

Regulation 3(c) corrects an incorrect cross-reference. Regulation 3(d) removes a reference to repealed legislation in paragraphs 7A(2) and (3)(a) of the schedule to the recognition requirements regulations. Regulation 3(e)(i) changes the word “notifications” to “applications”, which more accurately reflects what the relevant regulator rules do. Regulation 3(e)(ii) removes a reference to an FCA rule that has now been repealed. Regulation 3(f) removes a reference to regulation 46 of the markets in financial instruments regulations 2017, which is being repealed.

While every effort is made to avoid mistakes in legislation, mistakes happen from time to time in all Departments. I assure the committee that the onshoring SIs have been through all the usual internal and external checks that secondary legislation normally goes through. The Treasury has also worked closely with the financial regulators to develop these instruments, and industry has had the opportunity to check drafts that we have published.

Considering the volume of onshoring legislation that we have been preparing, these mistakes are not out of line with those that happen from time to time in the normal legislative process. So far, we have laid 53 statutory instruments, amounting to around 1,000 pages, and I think this is the 23rd debate under the affirmative procedure. The number of mistakes identified in onshoring SIs has been low, with most being minor and technical in nature. These drafting errors in the MIFI SI were picked up as part of continuing preparations to ensure that the UK’s regulatory regime operates effectively from exit. This SI therefore ensures that the MIFI SI will function as intended from exit day in a no-deal scenario.

In terms of industry engagement and transparency, the Treasury has worked closely with the regulators in the drafting of the draft instrument. The regulators will also undertake a public consultation on any deficiency fixes they propose to make to the technical standards covered by this SI. We have also engaged extensively with the financial services industry on the two key instruments to which the draft instrument relates.

In summary, the Government believe that the proposed legislation is necessary to ensure that recently adopted binding technical standards continue to operate effectively once brought into UK law by the EU (Withdrawal) Act 2018, and that the Markets in Financial Instruments SI effectively addresses the deficiencies in retained EU law if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the draft regulations. I commend the draft regulations to the Committee.

--- Later in debate ---

[John Glen]

I acknowledge the thoroughness of the scrutiny from the hon. Members for Stalybridge and Hyde and for Glenrothes, and my hon. Friend the Member for The Cotswolds, and I will address their specific points. I will refrain from going into a full disputation on the opening points made by the hon. Member for Stalybridge and Hyde. We have gone through this matter several times. All I can say is that we are able to bring to Committee only those statutory instruments that fit within the purview of the withdrawal Act as debated. And, despite the corrections that we are having to make today, I submit that this has been a thorough process.

The hon. Member for Glenrothes said that it was with some pride that I spoke about 53 statutory instruments. There is no pride; there is just a sense of clarity about the thoroughness and rigour of this approach, which includes 30 affirmative discussions in SI Committees.

The hon. Member for Stalybridge and Hyde asked how it was decided which BTS go to the FCA and so on; he asked about the allocation mechanism across the regulators. Frankly, they are allocated according to the functions of the regulators that were given to them previously by primary legislation, and BTS will go to the Prudential Regulation Authority in line with that. The hon. Gentleman asked about the resourcing. I am very confident that the regulators are making adequate preparations and effectively allocating resources ahead of March 2019. They have considerable experience and technical expertise in regulating the financial services sector to high standards—that is why the City of London remains, despite the unwelcome uncertainty, a vibrant place for financial services at this time—and they have actively participated in a wide range of groups developing technical policy and regulatory rules and chaired a number of committees and taskforces with considerable experience in implementing EU legislation. That means that the responsibilities of EU bodies can be reassigned efficiently and effectively, providing firms, funds and their customers with confidence after exit.

The hon. Gentleman asked a question about what role is foreseen for Parliament to hold regulators to account. Parliament will continue to be involved in every aspect of the process to onshore EU financial services regulation. All the changes that the Treasury will propose to level 1 legislation and delegated Acts will be put before Parliament to approve. Any transfer of responsibility to the regulators, including any transfer of powers to make technical standards, will be put before Parliament to approve through affirmative procedure SIs. The Treasury will continue to work closely with the Bank of England, the PRA, the FCA and the Payment Systems Regulator on how we fix deficiencies in EU financial services regulation, including binding technical standards.

The hon. Gentleman asked whether the FCA has a statutory obligation to consult. Yes, that is clearly set out in the regulators’ powers SI for future amendments. The regulators are consulting on all their deficiency fixes.

The hon. Gentleman asked why these additional binding technical standards were not incorporated in the relevant EU exit SIs and why they are only now being picked up. The mandates to produce these technical standards will already have transferred, post exit, the responsibility for them to UK regulators, but this SI transfers the responsibility to UK regulators for fixing deficiencies in new standards that have come into force since we laid the original SI. This SI is about making sure that our regulators are able to ensure that those are fixed in time for the standards to operate effectively from exit day.

The hon. Gentleman asked about an impact assessment. The reason why there is not one is the de minimis impact; there will be no impact on industry from this SI. It concerns the regulators’ functions and makes minor amendments to MIFI. That has already been impact-assessed.

My hon. Friend the Member for The Cotswolds asked about a dispute between the EU and our regulators. A process for consultation is set out in the financial regulators’ powers SI. Where regulators do not agree on a joint approach, they can each make separate provision in relation to the parts of the financial services industry they are responsible for regulating, so there is inherently some discretion there, but in the context of the accountability I set out, there are checks to that. However, through this process, there will not be any policy deviation from what has already been agreed.

I hope I have addressed the points that were raised. I recognise that going through all these statutory instruments is an arduous process, and I acknowledge the comments made by the hon. Member for Stalybridge and Hyde about the undesirability of the process. Of course, if we get a deal, which is the Government’s intention and policy, these SIs will not be required. However, it is important that we ensure that recently adopted binding technical standards continue to operate effectively and that the markets in financial instruments SI effectively addresses the deficiencies in retained EU law if the UK leaves without a deal or an implementation period.

I hope I have adequately responded to the points that were raised, and I hope the Committee has found the sitting informative and will be able to support the draft regulations.

Question put and agreed to.